In the last installment I discussed what a terrific investment Microsoft ended up being for my family during a 20 year, and counting, holding period. I really do attribute much of that success to the risky behavior of youth and pure luck. But as has been said in the past, “I’d rather be lucky than smart.”
In this post I will describe some income tax strategies I have used for my family in the past. As a CPA and retired Certified Financial Planner I have more expertise than most in these areas; however, this post is not income tax advice which should be sought by you from an expert prior to trying any of these techniques.
Having an investment turn into a 19 bagger, as Microsoft did for me, is a great feeling. It makes you feel like a successful investor. Yet at the same time you recognize that much of the gain you have achieved may be recaptured as income taxes. Capital gains taxes if in an open purchase account and regular income tax rates if in an IRA or other tax deferred account. All is not lost, as there are opportunities to minimize your tax liability over time. Not necessarily eliminate taxes, but optimize your tax bill.
As my eldest daughter was entering her senior year of high school in 2007, I discovered that was the last tax year that I would be able to gift Microsoft shares to her, and due to her very low income from a part-time job, she would benefit from a five percent capital gains tax rate in place at the time. In 2007 the ‘kiddie’ tax captured kids through age thirteen but starting in 2008 that was being raised to age 24 for college students. My capital gains rate would have been 15%, so this was a great opportunity to convert some Microsoft shares into the college tuition money I would need within a year’s time. Gifting approximately $20 thousand in stock to her from her mother and me resulted in income taxes due of less than $1 thousand, whereas, if I would have sold the shares in my name the tax would have been around $3 thousand. This neat little move saved our family two grand with really no effort other than a bit of research.
Our second opportunity to minimize taxes happened in 2013 with the same daughter. In this case I need to raise cash to pay for part of her wedding this past July. Under current capital gains tax rate rules if a married couple’s taxable income is less than $72,500 the capital gains tax rate is zero. That’s correct a big fat goose egg. Both of them had been out of school for a year and working in their chosen professions, he as a software engineer and she as a half-day kindergarten teacher. When you figure in the $3,900 personal exemption per person in the family and the standard deduction of $12,200, gross income below $92,500 gets the zero capital gains tax rate. Since they are below this level of income at this early stage of married life, I gifted a portion of the wedding money to them via Microsoft stock and allowed them to pay the tax bill of zero. With the current gift limits under the tax law set at $14 thousand per person, as a family we could have given up to $28 thousand and paid no income taxes. It doesn’t get any better than that and is part of what made this my greatest investment ever. It is still giving after over twenty years.